In this week’s video insight Roger reviews the current market situation, including the collapse of U.S. banks and in the fast-moving financial markets, while it may seem risky to rule out another GFC, the probability, upon an assessment of the odds, appears to be low.
Much has been said about the failure of Silvergate, Signature and Silicon Valley banks.
How it happened, why it happened and whose fault it was are topics that have all been covered. Indeed, we have written about those very subjects on our blog.
More important however is the subject of what the implications are for markets and the path of interest rates from here.
In the immortal words of Abraham Lincoln, who himself was quoting Greek philosophy; This too will pass.
In time, we won’t be thinking of the failure of these banks nor be concerned about any sway the event might hold over markets. Indeed, I think we will move on relatively quickly.
In an analysis of many U.S. regional banks, and in particular their available-for-sale, and their held-to-maturity securities, Silicon Valley Bank (SVB) was unique. It was unique in terms of geographic and industry concentration and it also ranked significantly worse than all others in terms of unrealised losses on invested securities. In fact, these losses were 100 per cent of equity. And as has been widely reported, the unrealised losses it accumulated on its investments represented a disproportionate share of its assets, rendering it particularly vulnerable to a run on its deposits, which of course occurred amid the drought of private equity and VC funding for its profitless tech company clients.
So, in the fast-moving financial markets, while it may seem risky to rule out another GFC, the probability, upon an assessment of the odds, appears to be low.
But, to be fair, not everyone holds that view.
For some investors, the recent measures taken by central banks and sovereign governments look eerily similar to the initial actions taken to try and stem the GFC fallout in 2007 and 2008. They point to the special liquidity facilities, advancing international swap lines, and record borrowing by U.S. banks from the Fed’s discount window. The optimists will say these are the safeguards required to prevent contagion. The pessimists, however will say measures intended to shore up confidence can ignite even more fear and an even worse crisis.
According to some reports, while Credit Suisse managed to find a buyer in UBS, with material assurances and support from the Swiss government, several stretched U.S. regional banks remain on the search for a rescue.
The circumstances today are very different to the GFC. First, the GFC was defined by lending to borrowers who could not afford repayments. Second, U.S. consumers are far less leveraged than they were back in 2007. Third, systemically important banks are far better capitalized and safeguards have been introduced to avoid a repeat performance of 2008/09.
Nevertheless, the first 10 minutes of TV news bulletins will always be dominated by doom and gloom, so the pessimists will be loudest.
And anyway if the GFC 2.0 did transpire, which I don’t believe it will, we got through it and it delivered mouthwatering prices. More to come…